Basic Economic Problem

Basic Economic Problem

1. Scarcity

   • Opportunity Cost
     • Next best alternative foregone when a choice is made
     • Econoic Systems
       • Market System
         • Pure market systems are free of government intervention. Price mechanism is how the three questions are answered which makes the consumer soveriegn.  Price acts as a signal, rationing device and incentive and can transfer preference. Firms respond to increased demands to achieve profits. The invisible hand. Assumption is consumers aim to maximise utility
       • Centrally Planned
         • 100% government influence and the 3 questions are attempted to be answered by them. Failed experiments in Soviet Union and China - Communists. No consumer or producer soveriegnity. Government decides what, how and for whom the produce goes to. Profit is not an objective. Factories get production targets.
         • Advantages
           • From each according to ability, to each according to need. Equality No profit so not exploitation
         • Disadvantages
           • Bureaucratic Slow decisions Unequal Government does not/cannot know what everyone needs Laziness and low productivity as no profit incentive
       • Mixed Economy
         • Blend of market and planned economies. Quantity varies massively. Most ecnonomies are mixed. Most efficient as benefits of both government intervention and market forces.
   • Not enough resources to satisfy human wants and needs

2. 3 fundamental economic questions

   • What to produce?
   • How to produce?
   • For whom ar ehte goods produced?