Tuesday 27 October 2009

Economic notes -- three basic economic problems

The three economic basic problems 1) What to produce? (Types and quantities of goods/services to produce) 2) How to produce? (Production methods) 3) For whom to produce? (How to distribute goods and services) Solutions to the three economic problems 1) By customs and traditions (Tradition economy) , e.g., decided by the father or eldest son in a family. 2) In a planned economy, resources are allocated by government plans and commands and people have to follow that in production and consumption. 3) In a market economy, most resources are owned privately. Resources are allocated by market mechanism or price system as a signals to guide resource allocation. Market economy: -Minimize government intervention -Resourced owned by private individuals -Economic decisions made by market prices -Resources allocation and distribution of goods by market prices Planned economy: -Government intervention is common -Resources owned by the state -Economic decisions made by the government -Resources allocation and distribution of goods by government command

Specialisation and exchange 1) Specialisation is a way of organizing production, different people/economics concentrate on producing different goods. Workers concentrate the job they’re best at. Then production cost can be reduced. 2) Exchange (trade) is an important condition for specialisation. Without exchange, then everyone have to produce all good by itself and specialisation can’t happen. 3) Private property rights – A good is a private property of someone if the owner has the following right: - exclusive right to use - exclusive right to receive income generated by the use of the good - right to transfer (not exclusive in all cases) If it’s not exist or not clearly defined, then goods become common property, then exchange can’t be happen so as specialisation. Then, it encourages non-price competition such as violence. If it’s clearly defined, then buyers can obtain good if the buyers can pay a certain price. Resources can be allocated to those who place the highest value on them. Positive statements talk about facts, no value judgments, some of them are refutable. Normative statements is about what should be, its about value judgment. Economic is a social science and we use scientific methods to develop theory. i.e., economics is positive.

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