Economic system
An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities ...
s as a type of
social system
In sociology, a social system is the patterned network of relationships constituting a coherent whole that exist between individuals, groups, and institutions. It is the formal structure of role and status that can form in a small, stable group. A ...
must confront and solve the three fundamental economic problems:
[Samuelson, P. Anthony., Samuelson, W. (1980). Economics. 11th ed. / New York: McGraw-Hill. p. 34 ]
* What kinds and quantities of
goods
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tr ...
shall be produced, "how much and which of alternative goods and services shall be produced?"
* How shall goods be produced? ..by whom and with what resources (using what technology)...?"
* For whom are the goods or services produced? Who benefits?
Samuelson rephrased this question as "how is the total of the
national product
National Product is a little-known rock band from Oahu, Hawaii.
History
National Product began playing local gigs while attending Kalaheo High School, and moved to California in 2000.Melissa MonizCover Story: Hot Rock from the Islands '' MidWeek ...
to be
distributed Distribution may refer to:
Mathematics
*Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations
*Probability distribution, the probability of a particular value or value range of a varia ...
among different individuals and families?"
Economic systems solve these problems in several ways:"... by custom and instinct; by command and centralized control (in
planned economies
A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, parti ...
) and in
mixed economies
A mixed economy is variously defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise. Common to all mixed economies ...
that "...uses both market signals and government directives to allocate goods and resources." The latter is variously defined as an
economic system
An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities ...
blending elements of a
market economy
A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers are ...
with elements of a
planned economy
A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, pa ...
,
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ...
s with
state interventionism
Economic interventionism, sometimes also called state interventionism, is an economic policy position favouring government intervention in the market process with the intention of correcting market failures and promoting the general welfare o ...
, or
private enterprise
A privately held company (or simply a private company) is a company whose shares and related rights or obligations are not offered for public subscription or publicly negotiated in the respective listed markets, but rather the company's stock is ...
with
public enterprise
A state-owned enterprise (SOE) is a government entity which is established or nationalised by the ''national government'' or ''provincial government'' by an executive order or an act of legislation in order to earn profit for the governme ...
..."
Samuelson wrote in ''Economics'', a "canonical textbook" of mainstream economic thought that "the
price mechanism
In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services, principally by the price elasticity of demand. A price mechanism affects both buyer and seller who nego ...
, working through supply and demand in competitive markets, operates to (simultaneously) answer the three fundamental problems in a mixed private enterprise system..."
At
competitive equilibrium
Competitive equilibrium (also called: Walrasian equilibrium) is a concept of economic equilibrium introduced by Kenneth Arrow and Gérard Debreu in 1951 appropriate for the analysis of commodity markets with flexible prices and many traders, and se ...
, the value society places on a good is equivalent to the value of the resources given up to produce it (
marginal benefit
In economics, utility is the satisfaction or benefit derived by consuming a product. The marginal utility of a good or service describes how much pleasure or satisfaction is gained by consumers as a result of the increase or decrease in consumpt ...
equals
marginal cost). This ensures
allocative efficiency
Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the mar ...
-the additional value society places on another unit of the good is equal to what society must give up in resources to produce it.
[Callan, S.J & Thomas, J.M. (2007). 'Modelling the Market Process: A Review of the Basics', Chapter 2 in ''Environmental Economics and Management: Theory, Politics and Applications'', 4th ed., Thompson Southwestern, Mason, OH, USA]
The solution to these problems is important because of the "fundamental fact of economic institution life" that ...
:"The economic problem, "the struggle for subsistence", always has been hitherto primary, most pressing problem of the human race- not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms." -Samuelson, Economics, 11th ed., 1980
Parts of the problem
The economic problem can be divided into three different parts, which are given below.
Problem of allocation of resources
The problem of
allocation of resources
In economics, resource allocation is the assignment of available resources to various uses. In the context of an entire economy, resources can be allocated by various means, such as markets, or planning.
In project management, resource allocatio ...
arises due to the
scarcity of resources, and refers to the question of which wants should be satisfied and which should be left unsatisfied. In other words, what to produce and how much to produce. More production of a good implies more resources required for the production of that good, and resources are scarce. These two facts together mean that, if a society decides to increase the production of some good, it has to withdraw some resources from the production of other goods. In other words, more production of a desired
commodity
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a co ...
can be made possible only by reducing the quantity of resources used in the production of other goods.
The problem of allocation deals with the question of whether to produce
capital goods
The economic concept of a capital good (also called complex product systems (CoPS),H. Rush, "Managing innovation in complex product systems (CoPS)," IEE Colloquium on EPSRC Technology Management Initiative (Engineering & Physical Sciences Researc ...
or
consumer goods
A final good or consumer good is a final product ready for sale that is used by the consumer to satisfy current wants or needs, unlike a intermediate good, which is used to produce other goods. A microwave oven or a bicycle is a final good, but ...
. If the community decides to produce capital goods, resources must be withdrawn from the production of consumer goods. In the long run, however,
nvestmentin capital goods augments the production of consumer goods. Thus, both capital and consumer goods are important. The problem is determining the optimal production ratio between the two.
Resources are scarce and it is important to use them as
efficiently as possible. Thus, it is essential to know if the production and distribution of
national product
National Product is a little-known rock band from Oahu, Hawaii.
History
National Product began playing local gigs while attending Kalaheo High School, and moved to California in 2000.Melissa MonizCover Story: Hot Rock from the Islands '' MidWeek ...
made by an economy is maximally efficient. The production becomes efficient only if the productive resources are utilized in such a way that any reallocation does not produce more of one good without reducing the output of any other good. In other words, ''efficient distribution'' means that redistributing goods cannot make anyone better off without making someone else worse off. (See
Pareto efficiency
Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engine ...
.)
The inefficiencies of production and distribution exist in all types of economies. The welfare of the people can be increased if these inefficiencies are ruled out. Some cost must be incurred to remove these inefficiencies. If the cost of removing these inefficiencies of production and distribution is more than the gain, then it is not worthwhile to remove them.َ
The problem of full employment of resources
In view of the scarce resources, the question of whether all available resources are fully utilized is an important one. A community should achieve maximum satisfaction by using the scarce resources in the best possible manner—not
wasting
In medicine, wasting, also known as wasting syndrome, refers to the process by which a debilitating disease causes muscle and fat tissue to "waste" away. Wasting is sometimes referred to as "acute malnutrition" because it is believed that epis ...
resources or using them inefficiently. There are two types of employment of resources:
*
Labour-intensive
*
Capital-intensive
In
capitalist economies, however, available resources are not fully used. In times of
depression, many people want to work but can't find employment. It supposes that the scarce resources are not fully utilized in a capitalistic economy
The problem of economic growth
If
productive capacity Productive capacity is the maximum possible output of an economy. According to the United Nations Conference on Trade and Development (UNCTAD), no agreed-upon definition of maximum output exists. UNCTAD itself proposes: "the productive ''resources'' ...
grows, an economy can produce progressively more goods, which raises the
standard of living
Standard of living is the level of income, comforts and services available, generally applied to a society or location, rather than to an individual. Standard of living is relevant because it is considered to contribute to an individual's quality ...
. The increase in productive capacity of an economy is called
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
. There are various factors affecting economic growth. The problems of economic growth have been discussed by numerous
growth models, including the
Harrod-Domar model, the neoclassical growth models of
Solow and Swan, and the
Cambridge growth models of Kaldor and Joan Robinson. This part of the economic problem is studied in the economies of development.
See also
*
Full employment
Full employment is a situation in which there is no cyclical or deficient-demand unemployment. Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely structural and frictional, may remain. Fo ...
*
Post-scarcity
Post-scarcity is a theoretical economic situation in which most goods can be produced in great abundance with minimal human labor needed, so that they become available to all very cheaply or even freely.
Post-scarcity does not mean that scarc ...
*
Job guarantee
A job guarantee is an economic policy proposal that aims to provide a sustainable solution to inflation and unemployment. Its aim is to create full employment and price stability by having the state promise to hire unemployed workers as an emp ...
*
Rivalry (economics)
In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is consid ...
*
Overpopulation
Overpopulation or overabundance is a phenomenon in which a species' population becomes larger than the carrying capacity of its environment. This may be caused by increased birth rates, lowered mortality rates, reduced predation or large scale ...
*
Degrowth
Degrowth (french: décroissance) is a term used for both a political, economic, and social movement as well as a set of theories that critique the paradigm of economic growth. It can be described as an extensive framework that is based on criti ...
*
Post-growth
Post-growth is stance on economic growth concerning the limits-to-growth dilemma — recognition that, on a planet of finite material resources, extractive economies and populations cannot grow infinitely. The term "post-growth" acknowledges th ...
*((poverty))
References
{{DEFAULTSORT:Economic Problem
*
Resource economics
Economic growth
sa:अर्थशास्त्रं