Introduction
This paper explores the various forms of economic systems and their methods of allocating resources. Economic resource allocation seeks to achieve economic efficiency in all dimensions of resource allocation among the various economic actors within any economic set up. The major focus will mainly entail the command economy as well as the market system of economy. A market system of economy, normally known as capitalism or free economy is a system of resource allocation in which the factors of production are allowed to move freely, the economy is allowed to operate freely without intervention from the central governments. It is an economy in which the invisible hand dominates all the transactions in the economy. The forces of demand and supply are the key determinants of economic conduct in such an economy without the meddling of the government or state apparatus. In the other system which is the command system, all resources and factors of production are allocated from the central government which decides on the distribution of the resources, as opposed to the former where the forces of demand and supply determine the market equilibrium. There are many conditionality which govern the conduct of the different economic entities within such an economy.
What is opportunity cost? How does the idea relate to the definition of economics? Which of the given decisions would entail a greater opportunity cost?
Opportunity cost can be defined as the cost of the next best foregone alternatives available. It is the cost incurred by a decision make by choosing an option and leaving out another option. It is the sacrifice made by a decision maker when faced with the challenge of two or more competing options.
The relation between opportunity cost and economics is rooted in rational decision making and choices of action for any economic entity. Economics is concerned with efficient resource allocation which relies on sound decisions and choices just like the concept of opportunity cost.
Among the given alternatives, the decision with a greater opportunity cost is allocating a square block in the heart of New York city for a surface parking lot.
Utility is an economic term used to describe the amount of benefit derived from a certain economic choice or option. It implies the amount of satisfaction obtained from the use or choice of a certain economic object. It can be utility obtained from money or other commodities like bread and cars.
Utility is the driver of purposeful behavior among economic actors because the utility derived from any object differs from one user to another. The differences in utilities derived fuel the purposeful behavior of consumers because each consumer derives a different amount of utiles from a particular good or choice
Three examples of recent decisions to weigh marginal cost and marginal benefit.
What are the key elements of the scientific method and how does the method relate to economic principles and laws?
- Observing the real-world behavior and outcomes.
- Hypotheses formulation to explain the observations.
- Testing the explanations and the hypotheses by comparing the outcomes of specific events.
- Accepting or rejecting the tested hypotheses depending on the results obtained from the tests.
- Continuous testing of the hypotheses against facts to evaluate their validity.
The economic principle and laws is a statement of economic behaviors and attempts to predict the probable outcome of certain economic actions just like the scientific method. Economists develop theories which are subjected to continuous tests before they are proved to be valid and applicable in the economic field. The invalid theories are usually disqualified and fully abandoned or they are modified to fit in the economic applications. This gives the economic laws and principles a scientific outlook. They are directly related to the scientific principles.
Contrast how a market system and a command economy try to cope with economic scarcity.
The market system, as explained earlier allocates scarce resources depending on the demand and supply of the same, freely, while the command or socialism system relies on the government for the allocation of resources. We shall contrast these two as below
Market system Command economy
How does self interest help achieve society’s economic goals? Why is there a wide variety of desired goods and services in a market system? In what way are entrepreneurs and businesses at the helm of the economy but commanded by consumers?
Self interest, the driving factor in a market oriented economy ensures that scarce resources are being scrambled for by everyone. The self interest goal means that each and every person wants to do the best, to be the best, and to deliver the best in their self interest. Economically, self interest means that people work very hard in order to achieve these self interest goals and this ensures that they prosper in all their undertakings. The aggregate success of each and every self interested party therefore leads to the success of a nation.
In case of wide variety of goods in a market economy- as explained earlier, market economy is motivated by self interest, which wants to be the best. The competition that comes with this sort of business ideology leads to innovation with the aim of reducing competition. Innovation, therefore leads to the production of many varieties of goods as is evident in the market economy.
The customer commands entrepreneurs in that in a market economy, the customer is the major determinant of what is to be produced, where and when and also at what cost. This is because, all products are normally intended for use by the customers therefore their needs are the driving forces for businesses. The consumers hold the rule of command because they are the owners of the demand force upon which the life of producers in the market depends. If the products of a certain business are not demanded by the consumers, such a business will not survive in the market. This leaves the survival of all businesses in the hands of consumer power.
Why is private property, and the protection of property rights so critical in the success of the market system?
As explained earlier, in a market system, the factors of production are quite important as they determine what is to be produced. Protection of private property rights as well as intellectual property therefore acts as an incentive to entrepreneurs to invest in the business as their property is safe.
This is however not an important aspect of the command economy since the government is a secure safe for the moneys, and may not need institute property protection as its actually the security of the property per se. The protection of private property is important because all economic entities operate in isolation and as such need independence of action in the market. The protection also serves to insulate the infant entities within the economy against unfair competition from the dominant entities. It is such protection which guarantees a sane and sober environment in the economy.
What are the advantages of using capital in the production process? What is meant by the term division of labor? What are the advantages of specialization in the use of human and material resources? Explain why exchange is the necessary consequence of specialization?
Capital in the production process refers to the use of machinery and equipment in the manufacturing/production process. There are quite a number of advantages that accrue to a company/business by the use of capital. Key among this is the obvious reason that capital increases efficiency in the operating process. Unlike the manual labor, or labor intensive production process, capital inputs in the production process normally ensure that the company is able to produce large quantities of items at relatively low costs, especially with increased production.
Secondly, machinery, unlike humans does not get ‘tired’ and can even be utilized day and night to increase productivity. This ensures that the company can continues to produce even after the normal working hours.
Uniformity of products is almost guaranteed with the use of machinery, as opposed to the use of manual manufacturing processes where it would be difficult to ensure that products are of the same quality and quantity.
Lastly is the fact that machinery and equipment evolves quite fast with many additional features that continue to improve efficiency and make work even easier. The production process is not only improved, but also the quality of products becomes great. This is only possible with the use of capital in the manufacturing process.
Division of labor in economic terms refers to a situation where work is divided amongst people in bits so that each person can be able to work on their portion, and specifically those portions of work that they are good at. Division of work actually leads to specialization, where people are assigned roles that they are best suited to perform.
Specialization leads to an increased output because the individuals engage in what they are best at. This enables them to produce optimally at minimal costs because they do not require any training in such areas of specialization: they are already trained. Specialization also leads to efficiency in the production process because those involved in production are geared towards ensuring that the ball never falls in their courts. These concerted efforts contribute to efficient production. Specialization ensures and guarantees ease of supervision and accountability in any economic entity. This is based on the fact that every point in the production cycle/ business cycle is entrusted with a specific individual who is always responsible for the performance of that area.
Exchange is the direct and necessary outcome of specialization because in a specialized economy, all entities are interdependent. This implies that an entity/ economic unit produces what they are best suited to produce and sell their surplus to those who need it but are not specialized in such production. In return, the economic unit outsources what they are not specialized in producing from those entities which do it. Specialization eventually compels the economy to operate symbiotically where there are mutual benefits for all economic units.
What problem does barter entail? Indicate the economic significance of money as amedium of exchange. What is meant by the statement `` we want money only to part with it’’?
Barter trade is an olden form of trade where goods were exchanged with other goods instead of money. It is a form of trade where goods and services are exchanged for other goods and services. The most significant problem encountered in this form of trade was mainly the ability to get equal measure for a commodity to trade in. the barter system of trade is arguably faced with the acute problem of lack of double coincidence of wants. The survival of the trade system is based on the condition that the a trader A who wants to buy a commodity X will have to search for a seller B of commodity X and at the same time demand/ need to buy whatever commodity the seller A is selling, say Y. The process of searching a partner who will match the demand and supply in barter system of trade is usually difficult and at times proves to be impossibility. Imagine someone who wants to trade a cow, for say, wheat; it was always difficult to know how much of wheat would be equivalent to the value of a cow. It would also be difficult to get someone who needs to buy a cow in exchange for wheat.
Another main problem was bulkiness of the goods. Mostly, the bulky goods could not easily be traded since it would be difficult to break them down to manageable quantities. The indivisibility of many goods posed a great threat and challenge to the existence of the barter system of trade. This means that if someone wanted to buy may be 2 cans of coke, and they have, say a bull to exchange, the bull cannot be reduced to smaller quantities that the client can be able to accept. This posed a major challenge. The market for such bulky goods usually proved a miracle field when there was no method of dividing and valuing the goods and services on trade.
The bulk of goods involved in barter were usually a source of insecurity for the traders who could not safely and secretly store their trade valuables. For instance if someone was in possession of a cow, they could not hide it and the public could openly see it. The system of trade also lacked a standard measure of value. There was no universal means of measuring the value of any goods and services. The trade resulted in crude and unfair value judgments most of the times because it was made a subjective process. For instance it was difficult to determine how many sheep would e exchanged for a cow.
The problems experienced in barter trade necessitated the need for money, whose significance cannot be over emphasized. The benefits of using money as a means of exchange are underscored by the qualities of money. Portability, divisibility, durability, malleability, these qualities ensure that money is widely adopted as a means of exchange.
Money, in modern economy is however used to run an economy. It’s not only a means of exchange, but is also utilized as catalyst to an economy. Using the monetary policies, the government is able to manipulate the economic variables to spur economic growth. The use of money as a medium of exchange is a guarantee for efficiency in the market. Money increases the certainty with which economic transactions are measured and valued. It is a guarantee for the survival of all transactions in the market as it solves the problem of double coincidence of wants: money is a universal medium of exchange with a legal tender. As such, it can be exchanged for any commodity in the market. It can be argued to be the spine upon which the present market economies stand and survive in efficient operation.
The term ‘we want money only to part with it’, highlights the nature of money. That money is only beneficial to an economy when it’s actually in motion. Parting with money on receiving it is a way of ensuring that the economy benefits, unlike holding it which would be detrimental to economic growth and development. It implies that money is intended to be in motion and the act of retaining money in ones pockets or bank accounts is non beneficial economically. Economic entities should always aim at ensuring that money is in motion and not retained in hands or pockets. To part with money implies active economic entity, the norm to survive in the economy
