Lecture 2. Basic Economic Problems
Economics is the science of making choice under conditions of scarcity. What are the basic issues about which choices are to be made? Any society must make choices about three important problems. They are
1. What to produce and in what quantities? Food or weapons; if so, in what quantities? Is it more food and less weapons or vice versa?
2. How shall goods be produced? Electricity from thermal power or from hydro power?
3. For whom shall the goods be produced? A few rich and many poor or most people in modest comfort?
These three basic problems are interdependent. The society must make proper choice about them in order to meet the development ...view middle of the document...
It produces exactly to its consumption requirements. It is a subsistence economy. There is not much of sales as there is only small scale production. The same product will be produced by every generation. The production techniques are traditional.
II. Capitalist Economy
A capitalist economy is an economic system in which the production and distribution of commodities take place through the mechanism of free markets. Hence it is also called as market economy or free trade economy. Each individual be it a producer, consumer or resource owner has considerable economic freedom. An individual has the freedom to buy and sell any number of goods and services and to choose any occupation. Thus a market economy has no central coordinator guiding its operation. But self-organization emerges amidst the functioning of market forces namely supply, demand and price. The salient features of capitalism are
1. Right to Private Property: Individuals have the right to buy and own property. There is no limit and they can own any amount of property. They also have legal rights to use their property in any way they like.
2. Profit-Motive: Profit is the only motive for the functioning of capitalism. Production decisions involving high risks are taken by individual only to earn large profits. Hence, profit-motive is the basic force that drives the capitalist economy.
3. Freedom of Choice: The question ‘what to produce?’ will be determined by the producers. They have the freedom to decide. The factors of production can also be employed anywhere freely to get due prices for their services. Similarly consumers have the freedom to buy anything they want.
4. Market Forces: Market forces like demand, supply and price are the signals to direct the system. Most of the economic activities are centered on price mechanism. Production, consumption and distribution questions are expected to be solved by market forces.
5. Minimal role of Government: As most of the basic economic problems are expected to be solved by market forces, the government has minimal role in the economy. Their role will be limited to some important functions. They include regulation of market, defence, foreign policy, currency, etc.
Merits of Capitalist Economy
1. Increase in productivity: In a capitalist economy every farmer, trader or industrialist can hold property and use it in any way he likes. He increases the productivity to meet his own self-interest. This in turn leads to increase in income, saving and investment.
2. Maximizes the Welfare: It is claimed that there is efficiency in production and resource use without any plan. The self-interest of individual also promotes society’s welfare.
3. Flexible System: The shortages and surpluses in the economy are generally adjusted by the forces of demand and supply. Thus it operates automatically through the price mechanism.
4. Non-interference of the State: The State has a minimum role to play. There is no conflict between the individual...