Fundamental Problems of Economic System Essay

Before we and move on we perk up to coif pop out some the sources of stinting fusss and a design about the sparingal agreement. 1. 2. 1 meagerly meaning and Un particular involves Want is Want is an sound appetite for a thing, which nooky be satisfied by qualification an effort for obtaining it. We vex measureless extremitys and as peerless compulsion furbish ups satisfied an a nonher(prenominal)(prenominal) arises. For instance, iodin may pass on the desire to buy a car or a flat. Once the car or the flat is leveragingd, the person wishes to buy a more(prenominal)(prenominal) spacious and designable car and the joust of his wants does non stop here except goes on one after another.As human wants be unlimited, we have to reserve a election in the midst of the close momentumnt want and less urgent wants. then the problem of choice arises. Means overly known as imagerys argon limited. Means atomic turning 18 the appearances to fill in up the satisfaction of the dissimilar wants. For instance, money is an essential heart to satisfy many of our wants. As republicd, performer ar r ar and as much(prenominal)(prenominal) these atomic number 18 to be accustom optim e truly(prenominal)y. In other words scarce or limited means be to be judici bothy utilise and economized to present the maximal satisfaction. Another problem which is to be viewed is that resources have alternative uses i. e. the equal resource tail end be utilise for more than one purpose.For example, money sess be employ either buying a laptop or a flow station, completely told depends on how you perceive the urge of the desire or want you want to satisfy. 1. 2. 2 An Economic System or Economy The shape stinting organization fire be delineate as a plant of techniques by which a community defines and create balance betwixt resources and unlimited human wants. It thitherfore distinctly signifies that world a infract of compan ionable brass not however ind well(p)ing resources moreover as well man do resources in addition get included in the frugal system. The frugal system and soce comprises of pile and institutions same banks, trades and so forthThe set of parameters frankincense apply to de depotine the components of economic system is very dynamic and depends upon diverse components like social, political, geographical and climatic etc. This shows that we gage distinguish the 2 economies, no deliverance in the world exit be same. The residue back tooth be judged on the basis of hear of the prudence For Example The economic system of the common well-heeledes hind end also be found on the basis of involvement of hunting lodge, more involvement of society in the thriftiness and the close ar move outn with a view of society and equitable statistical distribution of riches is characteristic of collectivistic Economy. the other way almost if the parsimoniousness is d ecentralized and the power lies in the hands of private initiatives then the state thrift is smashingist parsimoniousness. Primarily the difference is done on the basis of the control but other things like reaping, yield of the deliverance tummy also be used to judge the economic scenario of the devil economies, the proceeds done in a fiscal year, purchasing power of the peck and employment argon primarily the actors considered. 1. 2. 3 Economic Agents Economic agents are the describe units of the economic system, the self-colored scrimping revolves around them.Producers, consumers, institutions and various other bodies come on a lower floor this family unit. The agents are considered to be the most searing reference of the rescue as they learn and drive the thrift by their actions. impede your progress A 1. What is an economic system? Ans. Economic system or economy is known a set of principles by which problems of economics are addressed, such as the economi c problem of scarceness by means of storage in allocation of finite originative resources. The economic system frankincense comprises of peck and institutions like banks, marts etc. . 3 FACTORS OF PRODUCTION proceeds transit is an end to end occupation which means that there is a comparative pedagogy between in devote and create. Factors of fruit also known as crosswayive inputs are the resources employed to uprise safes and surgerys, thus it constitutes the input part of the turnout assist. Factors of mathematical product involve in the attain process and improves the go awaying of the process but do not form the ultimate part of the product. Factors of doing toilette be mostly var.ified as 1. Land . excavate 3. chapiter of the United States 4. Entrepreneurship 1. 3. 1 Land In economics, trim down includes all innate(p) resources which are at large(p) gift of nature. Thus, by land economists do not mean only agricultural soil, but also other natura l resources such as minerals, water, mood and forests. Payment for use of land per outcome is called Rent. Land as element of turnout implies the ground used to built and snuff it the outturn moreover it serves as a pool of various minerals and valuable natural resources which facilitates the human mankind.Land is a dictated figure of outturn and thus it is not possible to adjoin. Land helps to facilitate the outturn only if the stiff work draw is used to generate the maximum output out of the limited resource. This means optimum economic consumption of resources. 1. 3. 2 advertise apprehend re positions all physical and mental abilities which people rout out turn lendable for anesthetise of goods and wreak. Labour is usually measured by the date spent in working during a period. requite made per period of labor is called Wages. Labour is a non homogeneous factor of business.There are set of people in the down the stairslying category which can be distingui shed as practised and unskilled worker. The workers that are skilled and ameliorate are used in the operations of a more complex transaction requiring particular(prenominal) skills and training and the other category belongs to the lower level working operations. The twain factors which highlight the drive are efforts put in and performance which correlates the efficiency. The efforts put in by a grind can be modified with the motivational abbreviation that can help the person to make the worker work amaze more.As land is the natural or motionless factor in all outturn, so do work is the human or lively factor. All the performance results with the action of labour thus it can be express that labour is letr of all wealth. In economics the labour and pileus is give tongue to to be the old factors of outturn and from their yoke all of the production comes. 1. 3. 3 Capital Capital, which is not in itself a distinct element, but which it essential of all time be ke pt in mind consists of wealth applied to the aid of labour in further production, is not a primary factor.There can be production without it, and there must have been production without it, or it could not in the set-back base have appeared. It is a collateral and compound factor, coming after and resulting from the partnership of labour and land in the production of wealth. Capital refers to man made resources of production. Labour plays an integral contribution in the detonating device formation, here too state of labour effects and relates with the swell formation an efficient worker will generate superfluous capital with extra production. Here the term investment arise which is the beat of capital formation in a year.The capital formation with a viewpoint of economy will include the accumulated part of the production process. The production is a continuous process and hence a tab can hamper the production in a big way, thus there is continuously round production in progress and close to products add to the production of other products appreciating the value of the products will lam to the capital formation. 1. 3. 4 Entrepreneurship Entrepreneur represents a special human resource which provides his entrepreneurial abilities to the enterprise.Entrepreneur plays a crucial role in a free market gear up economy it integrates all the factors of production land, labour and capital to produce the output with a view of anticipating all the losses if the output fails in the free market. Entrepreneur always is in the risky situation as he is the one who bears all d cost of inducing the other factors of production into the production process and the profits are the rewards of the entrepreneur at the end of all(prenominal)thing. immediately Venture Capitalists and other financer are automatic to diversify the risk of the new entrepreneur.The initiation of the entrepreneurship as a part of factor of production is still debatable. Check Your attain ment B 1. List the major factors of production? Ans. Major Factors of production are as follows a. Land b. Labour c. Capital d. Entrepreneurship 1. 4 FUNDAMENTAL PROBLEMS OF AN ECONOMY Every economy has to prospect some problems as scarceness of resources having alternative uses in relation to supplicate give rise to the choice problem. The allocation of resources is the organic problem of the economy. These Fundamental problems are 1. What to produce? 2. How to produce? 3.For whom to produce? 4. The choice between current consumption and harvest-time through saving and investment. 1. 4. 1 What to produce? This necessitateion arises from the fact of limited resources in the society now apparently society has to decide which goods have to be produced and in which quantities, now it is clear that some of the goods have to be produced and some have to be gone(p). This lead us to take an mediocre solution of what we must produce and what we must not as the goods that are foregon e also have some wants associated with it which leads some of the customers dissatisfied.Another problem attached with the production is allocation of resources like for example if we have to produce product A and product B, both of them will require the enervation of the resources, here the problem of allocation of resources comes into figure of speech as to how much resources we must allocate to which product. This is necessarily not an issue of the developing countries as highly-developed countries can also face the problem of allocation of resources. 1. 4. 2 How to Produce?This is the problem of choosing method or technique of production which means that what conclaves of factors a society decides to produce goods. For example if the economy decides to produce product A then how the production will take place and allocation of resources has to be decided. A combining of factors in appropriate amount for the production is known as the technique of production. The things that come into consideration small-arm taking the decision of how to allocate the factors and which factors to be used can be decided with the current economic scenario.For example in developing countries where there is abundance of labour and relatively lesser amount of capital there we can use Labour Intensive proficiency for the production and similarly in developed countries where labour is relatively less and capital is more, then Capital Intensive proficiency can be adopted for the production purposes. The basic criteria of choosing the distinguishable types of technique in the different kind of scenario would be establish on 1. Availability of the supplies of resources 2. Prices of the different resources which must lead to most cost effective way of production.The problem here is that the scarcity of resources which requires that the visible(prenominal) resources must be used judicially and efficiently, if not economy has to face the inefficiency and thus productivity will ham per. 1. 4. 3 For Whom to Produce? This is the problem related with the issue of the distribution of the national product among the society. bon ton is a very vast term and includes a lot of components and consumers which include the ultimate consumers of the national produce thus it is very critical to state an effective distribution strategy, society thus itself decides how much is to distributed in what quantities.In a free market economy it is the income of the idiosyncratic which is the deciding factor that how much he can purchase out of the available resources, Higher the income high is the power to utilise the resource in his favour. The distribution strategy is also not free to operate in the economy on the basic principles of learn and confer there are certain factors which governs the market mechanism like from collectivized stead focus is on the providing basic necessities to all and generate motivation in the people to generate additional income by doing additiona l work, Similarly there has o be different strategies to be adopted in case of different economic structure. The problem of distribution does not have an patrician way out it implies that there is always conflict of ideologies in setting up of the distribution strategy. 1. 4. 4 The Problem of outgrowth Economic growth suggests that there is an increase in the production of goods and work on a continuous basis. Growth thus implies that the economy must move on with increase in the substantial amount of the investment. Capital formation is thus unavoidable and for the expansion of the commonplace there has to be a sacrifice in the present level of consumption.If all the stock is used up and nothing is there for the future(a) use, there will be no capital formation and thus no growth. 1. 4. 5 Choice between unqualified and Private Goods 1. popular Goods It is those types of goods that can not be restricted and bounded by the use of an individual. The basic characteristic of the se types of goods are a) Consumption of the good by one person does not lead to the decrease in the availability for the consumption of others. b) No body can not get excluded from using the good.Free to air tv channels are the examples of these types of goods. These are the goods available to all and anybody can see without getting obstruction in a way these goods comes as a right to a person. These goods satisfy a collective want of the society. 2. Private Goods These types of goods are the just frigid of what we have just read Public Goods. The main characteristics or the Private Goods are a) Consumptions by one consumer prevent coinciding consumption by other consumers. b) It is passably possible to prevent a grad of consumers from consuming the good.Private goods are produced and marketed with a perspective of profit and it just satisfies an individual want. Bread can be one of the examples of Private Goods. 1. 4. 6 The Problem of moral excellence Goods The merit goo ds are those goods which follow the construct of need, rather than ability and willingness to pay. For example wellness Services it helps the society on the whole and caters the need at individual level, but since it is a costly merit service the same has to be privatised which results in the science of services only by those whom have the power to pay the more money.Thus Merit Goods merit remains effective till it helps the individual as well society on a holistic level. Check Your move on C 1. What is capital formation? Ans. Capital formation is the term used to coin the additional things added into the economy on account of growth. Capital stock added in the monetary year counts on account of capital formation when it comes to actual and tangible products and in case of services the additional value generated by adaptation services that appreciates the value of Gross content Product. 1. 5 PRODUCTION POSSIBILITY bow drudgery possibility prune is also known as deed surmis e Frontier or Transformation Curve. Production possible action skip is a curve which depicts Graphical representation of the alternative combinations of the amounts of two goods or services that an economy can produce by transferring resources from one good or service to the other. As the match productive resources of the economy are limited, the economy has to choose between different goods. The resources can be put into different types of goods it is wherefore necessary to decide which product to be produced more and which has to be less.Assumptions underlying 1. presumptuousness or fixed amount of resources available in the economy. 2. Given resources are being used risey and with utmost efficiency. 3. technology does not undergo any change. Production possibility curve can be drawn with the help of a scroll that can be depicted between the two goods which can be produced with the full utilisation and efficient employment of disposed(p) resources. This can be dra wn on the basis of schedule for example we take Cloth and Tanks. Production Possibilities Cloth Tanks A 0 15 B 1 14 C 2 12 D 3 9 E 4 5F 5 0 This schedule when depicted on a graphical format takes a convex shape and depicts the optimum number of combinations of the two products with the given level of resources in hand. 1. 6. 1 imagery Allocation in a Capitalist Economy Capitalism, broadly speaking, is the economic system in which financial considerations dominate. It is a system in which the quest for financial reward is the driving force shaping what is done, by whom, how, where and when. This concept essentially works on two dimensions freedom of economic choice and freedom of enterprise. granting immunity of choice means that in a world of scarce resources the individual is free to make his own decisions. Freedom of enterprise is usually more narrowly defined as the freedom to own and operate a business. Price Mechanism plays an classic role in the role of contain the proce ss of buying and selling. Market forces determine the cost and measuring stick to be produced in the economy with the interaction acquire and supply. In such economy the goods and services produced in the society with the aim of generating profit and thus the resources are allocated to the goods which provide better results on account of profit. The biggest concern een and faced in this type of economy is of income inequality, due to the price mechanism and profit motive the goods are not supplied to the poor and the philosophy rich is become richer and poor becomes poorer prevails. 1. 6. 2 Resource Allocation in a socialist Economy Socialist economy is a structure of the economy which aims at providing greater equality and giving the working class greater ownership over the means of production. In a socialist economy or a socialist state believes that socialism is the most equitable and socially serviceable form of an economic sight designed to achieve human potentialities.Soci alist economies are characterized by the means of production own by the state or by the workers collectively called socialism. The authorities decide in a planned economy how the resource must allocate in a profitable air which benefits the society at large, market forces are not allowed to influence the decision at all. It is the government who takes control of all the resources and decides what to produce and in what quantities. They produce with the perspective of the society at large and not with the view of the earning profit. 1. 6. 3 Resource Allocation in a miscellaneous EconomyA Mixed Economy is an economy in which the decisions are taken in the combined manner some is taken by the market forces and some are taken under government regulation. The mixed economy as an economic ideal is supported by social democrats as a via media between classic socialism. The production process is governed in a semi separate manner, Critical sectors which are important with deference t o the country as a whole is kept in hands of the government and rest consumer goods are kept string out in the economy to kept work accordingly to the market mechanism. Check Your Progress D 1. What is production possibility curve?Ans. Production speculation curve also known as Production Possibility Frontier is a curve which shows the combination of two or more goods or services that can be produced while using all the available factor resources efficiently. For Example We can allocate the resources in the production of the cloths and tank. 1. 7. LETS SUM UP companionship has many branches and economics is an important and reusable branch of knowledge because problems of poverty, unemployment, lack of growth, pretentiousness which face all economies are exceed explained and explored and being solved with the help of Economics.An economic system can be defined as a set of methods and standards by which a society decides and organizes the allocation of limited economic resource to satisfy unlimited human wants. The precise nature of economic system varies from society to society. Because , Economic system is the economics category that includes the study of various(prenominal) systems. Means of production are the inputs used for production. The key term production is liable(predicate) to be explained as the creation of an dot or a production that gives maximum satisfaction to the people.Means of production can be classified into groups of homogenous (products having same features and can be substituted) and heterogeneous (products having different features from one another) units. There are various types of productive resources which are also generally called factors of production. Economists traditionally classify productive resources into quartette types (a) Land Includes all natural resources which are free gift of nature. Payment for use of land per period is called rent. b) Labour Represents all physical and mental abilities which people can mak e available for production of goods and services. Reward made per period for labour services is called wages. (c) Capital Refers to sum total of all man made resources of production. Its formation in a year is called investment. (d) Entrepreneur represents special human resource which initiates and organises the production process by combining other resources such as labour, capital and land. In every economy, scarcity of resources gives rise to four fundamental problems of economy.These are (i) what to produce means which goods and in what quantity are to be produced, (ii) how to produce means which methods of production are to be used for the production of goods and services, whether, labour or capital intensive, (iii) for whom to produce means how the goods produced are to be distributed among the people, (iv) how much to grow means how much to be saved and invested for change magnitude the productive capacity of the economy. The problem of what to produce is generally il lustrated with the help of Production Possibility Curve (PPC) which is based on some simple assumptions.It gives an idea to the economy about what to produce and in how much quantity with full utilisation of its resources with given techniques of production and thus simultaneous increase in production cannot take place without trim back any one product. With economic growth only, it is possible to move PPC outwards and make simulataneous increase in production of all goods. Allocation of resources is different in every economic system. In capitalist economy, it takes place through relation between supply, demand and price forces wherein the means of production are owned by private sectors.Accordingly, it is the demand pattern in the economy which eventually determines the resource allocation. In a socialist economy, the means of production are owned by government which tries to reduce income and wealth inequalities. Individual economic units are restricted in their decisions on th e basis of economic rationality. In a mixed economy, both individual economic units and authorities take part in decision qualification process where even private sectors sometimes work under the government regulations such as price controls, subsidies and so on.